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China Watch: Worries Heighten for US-Listed Chinese Companies as the SEC Escalates Accounting Dispute


Yum Brands and Microsoft also makes the news.

MINYANVILLE ORIGINAL US-listed shares of Chinese companies had a start-of-the-week swoon after the Securities and Exchange Commission charged the Chinese affiliates of five major accounting firms, including Deloitte, KPMG, PricewaterhouseCoopers, BDO and Ernst & Young, with violations of securities law, saying that they had refused to hand over work papers of nine Chinese companies suspected of accounting fraud.

The likes of Baidu (NASDAQ:BIDU), Sina (NASDAQ:SINA), and New Oriental Education & Technology Group (NYSE:EDU) promptly fell after this piece of news broke.

The SEC and the Chinese Securities Regulatory Commission have been engaged in talks for months in an attempt to reach a solution, though no headway has yet been made. The key issue is that the Chinese laws consider audit documents to be state secrets, and as such those cannot be handed over to the SEC without express consent by Chinese regulators.

The fear now is that SEC action could cause these accounting firms, who conduct audit work for many of these Chinese companies, to lose their licenses, which would mean that Chinese companies would have to delist from US stock markets.

"I'm not optimistic that a solution is reachable," said Paul Gillis, an accounting professor at Peking University's Guanghua School of Management in Beijing, according to the Wall Street Journal. "The biggest loser if it goes down this road is the American exchanges because it makes the US a much less attractive place to raise capital."

Meanwhile US companies with business in China are also worried that they, too, will have trouble producing audit reports if the five big accounting firms were barred by the SEC.

"If these five accounting firms are barred from practicing before the SEC, it seems certain that companies with major Chinese operations will find it difficult or impossible to find accountants," said Thomas Shoesmith, a partner at the law firm Pillsbury, in a client note.

Both Yum Brands (NYSE:YUM) and Caterpillar (NYSE:CAT) expressed their concerns to the New York Times.

Jonathan Blum, a spokesman for Yum, told the Times, "It would impact us and any other US company with significant operations in China. Essentially, there would be no auditors in China that the US government would recognize. It will require a diplomatic resolution, I believe, and we are monitoring the situation."

"As this issue revolves around differences between US and Chinese regulators, Caterpillar hopes each side can work to resolve this issue while demonstrating mutual respect and understanding for the laws and regulations of each country," said Caterpillar.

Here is the rest of this week's business headlines:
Yum Brands: Though China's economic growth has slowed while restaurant competition has increased, Yum Brands still plans to increase the pace of Pizza Hut restaurant openings in the country because they enjoy higher margins and have less competition than Yum's other big China brand, KFC.

Yum's competitors in China include other US corporations such as McDonald's (NYSE:MCD), Papa John's (NASDAQ:PZZA), Starbucks (NASDAQ:SBUX), and Asian chains like Taiwan's Dico's and Ajisen (China) Holdings (PINK:AJSCF). To boost the chain's popularity, Yum also said it would be expanding Pizza Hut's menu to include some Chinese food items.

"It won't be too long before we reach 1,000" Pizza Hut restaurants in China, Angela Loh, Yum China's chief concept officer, told Fox Business News.

Rent and labor costs have jumped sharply in China's major cities, so Yum will instead focus its expansion on smaller cities, where costs are lower and where there is "consumer enthusiasm for our brands" Yum China Chief Financial Officer Weiwei Chen said.

For 2013, Yum projected same-store sales growth in the mid-single-digit percentage, with sales expected to pick up in the second half after a weaker first half.

Microsoft (NASDAQ:MSFT): Microsoft and China Unicom (NYSE:CHU) have announced an alliance aimed at developing a more innovative Windows Phone and boosting the sales of these phones in the China market.

According to China Daily, Microsoft will provide technical and marketing support, and also help train sales associates, while China Unicom will push more products using the Windows operating system.

"China is the No. 1 market worldwide in terms of PC, tablet, mobile and Internet users. It is a very exciting place. We believe there is a great opportunity across the country to provide new business models to partners, new technologies to developers and best services to customers," said Microsoft's Chief Operating Officer Steven Turner about the new alliance at a news briefing in Beijing.

The alliance will include several smartphone manufacturers, including Nokia (NYSE:NOK), HTC (TPE:2498) and Samsung (PINK:SSNLF), as well as chipset makers Qualcomm (NASDAQ:QCOM) and Intel (NASDAQ:INTC).

As of the third quarter this year, Windows Phone devices only hold less than 3% of the Chinese smartphone market, according to research firm Analysys. Android (NASDAQ:GOOG) phones lead the way with a 72% market share.

Starbucks: While the likes of Yum Brands and McDonald's have seen their sales stall this year as China's economy has slowed, Starbucks is still going strong, said Starbucks's president of China and Asia-Pacific, John Culver, at an investor conference Wednesday.

"From a regional perspective, we have seen the momentum of our same-store sales in the fourth quarter sustained in the first two months of the current quarter," Culver said, according to the Journal.

Such is the momentum of store expansion in China that Starbucks said the mainland would become its second-largest market outside the US come 2014.

"We continue to see very healthy growth coming out of China. We are very aware of the economic environment there, but there is clearly a pent-up demand that is in the very nascent stage of us achieving saturation," Culver noted.

Starbucks now has some 700 stores in China, compared to 11,000 in the US. The outlets in China make an average of $886,000 in annual revenue, an increase from $507,000 in 2008.

Twitter: @sterlingwong
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